It’s Not the Age Bands, It’s the Medical Underwriting

Austin dissents from my critique of the health reform proposal offered by health policy experts at the American Enterprise Institute (AEI) last week. It seems useful to clarify what we disagree about and why.

To be sure, ACA is an imperfect project and product. Its authors might be the first to agree that it should go further in curbing regressive tax expenditures, in making better use of comparative effectiveness research, in offering more creative approaches to prevent and address medical injuries and malpractice.

We’re about to see how imperfect the ACA really is, as the titanic political and administrative struggle over implementation goes live later this year. I share Austin’s fears that the bitter fight poisons our ability to think creatively and fairly about many aspects of health policy.

As health policy experts, commentators, and advocates, we owe our audience transparency and analytic clarity. Partisan combat, not to mention simple disciplinary blinders, make all of us more intellectually and ideologically rigid than we should be. None of us is fully above the fray. A glossily-published health plan titled Best of both worlds, released at a fancy televised American Enterprise Institute event, is certainly a political object.

Advocates of universal coverage should think carefully about the prospects of adverse selection undermining health insurance exchanges. These dangers will be especially acute at the origin of such arrangements. Enrollment may be limited. The individual mandate will be weak and untested. Outreach to healthy consumers may be poor. Disproportionate numbers of people with preexisting conditions, participants in state high-risk pools, and others with high expected expenditures may be the first to enroll.

The mere act of suggesting alternatives and modifications of the ACA in response to such challenges should not be dismissed. Proposals deserve to be evaluated on the basis of their creativity, their feasibility of implementation, and their analytic clarity, not whether, at this moment, they are likely to be implemented.

I’m dismayed by the plan’s specific content, not by the effort to provide a provocative and useful alternative to the ACA. (I happen to think most Americans would reject the fundamental structure of this plan once its details are presented, but that’s another matter.)

Despite various flaws, the ACA provides one crucial reform that should be defended: It will dismantle the practice of medical underwriting and associated practices by which insurers pursue risk-selection as a basic business model within the individual and small-group market. Such practices are socially wasteful, since firms expend resources and distort their product offerings to avoid high-cost consumers. These practices also impose heavy burdens and indignities on millions of people.

These burdens and indignities are so much higher in the United States than in virtually any other industrial democracy. It’s not clear what benefits-if any-our current organization of the insurance market provides to offset these disadvantages. That’s one fundamental motive for health care reform.

The ACA addresses these problems through (incomplete) community rating, more stringent regulation, essential benefit requirements, an individual mandate, and subsidies to help people with low or modest incomes to afford to do so.

As Austin rightly notes, the ACA isn’t purely community rated. Smokers pay more for coverage. Older people pay more, too. We might have to tinker with these details to make the new exchanges work. If the new plan’s authors had called at AEI for larger age-gradients in premiums and for greater subsidies for low-income young people, I would have reacted quite differently to what they wrote.

But that’s not what they wrote. They call for an experience-rated system, and advanced the idea of “individualized premiums” as a feature not a bug. As Austin writes:

This is radical. Does that make it a “gigantic blunder”? Considering the plan also includes income- and health-based subsidies and multi-year contracts to guard against reclassification risk, I’m not so sure. I think it warrants consideration, discussion, and analysis.

So it does. The technical challenges of the proposed system are no less daunting than those confronting the structure produced by the ACA. Once you allow insurers to experience-rate, you rely heavily on regulators’ ability to perform proper risk-adjustment to protect the sick and the injured. The AEI authors don’t say much about the legal, regulatory, and competitive realities of how an overtly risk-rated insurance system would actually function. This is a somewhat different enterprise from the (also-necessary) micro-simulations required to specify costs and subsidies.

Community rating—albeit with mechanical exceptions for age and for smoking status-sends a clear signal that insurers are not to cherry-pick on the basis of consumers’ individual health histories. This sends a clear signal to consumers too, that they won’t have to answer intrusive questions about the time they sought mental health services after they broke up with their college boyfriend. They won’t have to worry that they will be charged more for insurance because they’re getting fat or have some other health problem.

Community rating is a promise. The practical challenges to its achievement remain significant. Yet the practical obstacles to individualized premiums are also severe, as are the accompanying risks. It’s simpler and expresses better social values to uproot the enterprise of medical underwriting altogether. That’s a key accomplishment of national single-payer plans. A market-based insurance system that fails to do the same will never fully earn-or really fully deserve-public legitimacy.

As I noted, it is noteworthy that no wealthy democracy seems to implement universal coverage through individualized premium systems. Several countries implement market-based, community-rated health financing systems. The good ones produce better population health outcomes, provide better protections for the sick and injured, are more economical, and are less administratively complex than our own insurance system. We need to figure out how to do this, too.

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